A recent study showed that over 12.5 billion breakfast visits were made to U.S. foodservice outlets in 2013 -- a 3% gain over 2012. Some quick-service chains are well ahead of the curve, including McDonald's (NYSE:MCD), Yum! Brands' (NYSE:YUM) Taco Bell, and Starbucks (NASDAQ:SBUX), which continue to improve or introduce new breakfast menu options.
Despite its dominance during the breakfast timeslot, McDonald's has struggled to produce same-stores sales growth in the U.S. for four straight months, and its stock price has fallen behind the S&P 500 significantly over the past year. This past week, though, McDonald's announced a free coffee campaign at its U.S. restaurants for March 31 to April 13.
Even though this isn't the first time McDonald's has given away coffee for free, this campaign couldn't have been timed more perfectly.
Disrupts Taco Bell's nationwide breakfast debut
Taco Bell's nationwide breakfast launch on March 27 was the biggest launch in the company's 52-year history. It was supported by a massive marketing campaign that included the mailing out of 1,000 Samsung cell phones, and social media marketing through Facebook and Twitter.
It is likely that free coffee from McDonald's won't do any long-term damage to Taco Bell's position within the breakfast category. However, it does raise comparisons between each chain's breakfast offerings because while you can get coffee at Taco Bell for $1.49 and test out its other 12 new breakfast menu items, free coffee at McDonald's can definitely disrupt any momentum Taco Bell was trying to gain with the launch.
Disrupting Starbucks' momentum
Starbucks has been chasing McDonald's and other leading chains that serve breakfast in recent months. Earlier this year, Starbucks introduced four new breakfast sandwiches. Its new English muffin breakfast sandwich has been directly compared to McDonald's Egg White Delight McMuffin.
However, over the past week, Starbucks has received some backlash over its revamped breakfast menu. Customers have complained that many items are too pricey and smaller than competitor's options.
Customers that find Starbucks breakfast food not to their liking may take McDonald's up on its free coffee offer and consider testing out other items on the McDonald's breakfast menu.
Free looks really good when coffee prices are rising
Unlike smaller coffee shops, Starbucks has its coffee costs locked in at least for another year. However, droughts in Brazil and other prime coffee growing areas have raised coffee prices above $2 per pound, up from $1.06 per pound in November 2013. This increase has become the biggest rally since July 1994.
As a consequence, smaller coffee cafes have had to raise the prices of the coffee they sell, which may turn customers away to cheaper alternatives like McDonald's.
Other reasons why free coffee at McDonald's is awesome
During McDonald's last earnings conference call, the company stated the importance of its competitive advantage during breakfast and how expanding its coffee menu will enhance breakfast. The free coffee campaign can build significant momentum for McDonald's into the summer as it continues to push its new coffee selection.
Furthermore, despite the counterintuitive nature of introducing coffee during the summer instead of the winter, it really makes sense from the standpoint that this past severe winter hurt traffic for many retailers including McDonald's.
Relative to other advertising strategies, free coffee is also a cheap marketing expense for McDonald's. In 2013, McDonald's spent over $988 million on advertising. The 5.2% jump was the highest increase of any industry.
McDonald's partnered with Kraft last year to begin selling McCafe coffee in grocery stores. Introducing new and old customers to coffee in McDonald's restaurants for free can go a long way in not only advertising the coffee to customers, but also spreading word-of-mouth for far less than national TV commercials cost.
Lastly, the recent announcement that COO Tim Fenton, a 41-year veteran, would be retiring on Oct. 1 this year made some shareholders question the long-term leadership at McDonald's. He had been considered to contend for the CEO position in the future.
If this free coffee campaign is successful in creating market share growth within the breakfast segment, as well as reversing negative same-store sales trends in U.S. stores, it could ease the minds of shareholders and give them confidence that the current CEO Don Thompson can turn the ship around.
McDonald's has offered free coffee several times in the past, including many separate occasions in 2013. However, the timing of its current campaign couldn't have been any better. It disrupts Taco Bell's breakfast debut while offering Starbucks' customers an alternative as the coffee giant tries to fix its own breakfast menu offering. You could say that free coffee is like killing two birds with one stone.
Michael Carter has no position in any stocks mentioned. The Motley Fool recommends McDonald's and Starbucks. The Motley Fool owns shares of McDonald's and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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